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Financial Accounting: In an Economic Context by Jamie Pratt

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INTERNATIONAL PERSPECTIVE: FINANCIAL STATEMENT ANALYSIS IN AN INTERNATIONAL SETTING

U.S. investors are showing increasing interest in foreign securities traded on foreign markets, and the securities of more and more non-U.S. firms using International Financial Reporting Standards (IFRS) are being listed on the U.S. exchanges. Such securities often provide returns that exceed those available from U.S. firms, and holding foreign stocks can help reduce an investor's risk by diversifying the investment portfolio to include securities of companies from more than one country. In most cases, the choice to buy or sell a foreign security is based on financial information provided by the investee company, which, in turn, presents the investor with the difficult challenge of analyzing and interpreting financial statements prepared according to foreign accounting (often IFRS) and business norms.12

Investors interested in comparing the financial performance and condition of companies from different countries often must contend with two difficult issues. First, if the companies use different accounting standards (e.g., U.S. GAAP vs. IFRS), the reported values must be adjusted to a common basis so that reasonable comparisons can be made.

12. Some non-U.S. companies, especially small ones, publish financial statements based on standards established by the government of their country.

Consider, for example, an investor analyzing the cell phone industry and involved in comparing Finland-based Nokia, ...

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